The marginal tax rate is the percentage of tax you pay on the next dollar of income you earn. It reflects the highest tax bracket you fall into under a progressive tax system.
How It Works
If you earn more money and move into a higher tax bracket, only the additional income above the threshold is taxed at the higher rate. The rest of your income is still taxed at the lower brackets’ rates.
Why It Matters
- Tax planning: Understanding your marginal rate helps with decisions like RRSP contributions or earning extra income.
- Fairness: Ensures higher earnings are taxed more heavily, while lower income remains at lower rates.
Final Thoughts
The marginal tax rate is crucial for understanding how additional income will be taxed. It is especially important when planning raises, bonuses, or contributions to tax-advantaged accounts.